Establishing a SEP
Choosing a Financial Institution
You'll need to choose a financial institution to serve as trustee of the SEP-IRAs that will hold each employee/participant’s retirement plan assets. These accounts will receive the contributions you make to the plan.
Set-Up Steps for a SEP
There are three steps to establishing a SEP.
- Execute a written agreement to provide benefits to all eligible employees.
- Give employees certain information about the agreement.
- Set up an IRA account for each employee.
The written agreement must include the name of the employer, the requirements for employee participation, the signature of a responsible official and a definite allocation formula.
The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement. Do not file this form with the IRS.
You may not use Form 5305 - SEP if you:
- Maintain any other qualified plan (except another SEP - a plan is "maintained" even if no contributions were made during the year),
- Use the services of leased employees,
- Want a plan year other than the calendar year, or
- Want an allocation formula that takes into account Social Security contributions you made for your employees.
If you can't use the Form 5305-SEP, you may use a prototype document. A mutual fund, insurance company, bank or other qualified institution usually provides these. You may also have a SEP individually designed for your business.
Provide Information to Participants
You must furnish your eligible employees:
- Notice that you have adopted the SEP
- Requirements for receiving an allocation
- The basis on which the employer contribution will be allocated
If you use Form 5305-SEP, you must give your employees a copy of the form and its instructions. The model SEP is not considered adopted until each employee is provided with the following information:
- A statement that IRAs other than the one the employer contributes to may provide different rates of return and contain different terms.
- A statement that the administrator of the SEP will provide a copy of any amendments within 30 days of the effective date along with a written explanation of its effects.
- The administrator will give written notification to the participant of any employer contributions made to a participant's IRA by
January 31of the following year.
If you use a prototype or individually designed plan you must give all eligible employees similar information.
Set Up a SEP-IRA for Each Employee
A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.
You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.
Timing of Setting Up a SEP Plan
You can set up a SEP for a year as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.